sonali: from new york city for our viewers worldwide. i'm sonali basak. "bloomberg real yield" starts right now. ♪

sonali: coming up. consumer confidence starts to break. inflation expectations stay high. that is all as investors await cpi data just days away. we begin with the big issue. the fed confidence to cut with messy economic data. >> the fed is looking closely at the data. >> it is looking at the totality of the data. >> wage growth is sticky. >> the fed is likely going to take a to the economy. i think later this year, we will get our first cut. >> if they don't cut in september, likely to cut in december. the first in september, another in december. >> we are looking at an inflection point. i think he's looking for a reason. >> it is rare the fed would intervene before november. will he remain patient through the election? >> there's a question of will

inflation be enough by then? >> coming in hopefully moving in the direction we want to see both on inflation, in terms of restoring balance to the economy. sonali: we are looking at a double-edged sword. u.s. consumer sentiment declined in early may to a six-month low. short-term inflation expectations and concerns about the job market have picked up. what this means is the economy is softening. with inflation still high, there is a question on how quickly the fed can cut. the current expectation is at least once this year. if you flip up the board and look at the credit spreads. they have collapsed across the board from investment grade to junk bonds. the extra yield investors get for owning debt instead of government bonds is the lowest in two and a half years. the expectations for fed rate cuts, we said just one this year. that has changed drastically

from earlier in the year where there were six expected. spreads have remained ultra tight. we caught up with the minneapolis fed president on the sidelines of milken. here's what he had to say of inflation. >> we are committed to 2%, we will get to 2%. we will get the interest rate environment necessary in order to achieve 2%. the second half of 2023 surprised us at how rapidly inflation fell. it seemed like it stalled out. it is too soon to declare we definitely stalled out, or maybe it is taking more time. joining us is barry knapp. and skyler montgomery koning of ts lombard. you look at the conflicting signs and the data. something's starting to weaken. yields have been interesting in the shorter end of the curve. even though we saw it go lower last year, we have been wavering around the 4.8% level. where do you think we go from here?

>> i'd like to find more than the backend -- >> i like the front end more than the backend. three more scenarios, one being the most likely, which is rates move higher, retest the 5% peak that they reached in late october amidst the increase in treasury issuance of notes and bonds. that is the most probable scenario for me. last month's employments report, -- last friday's implant report opened up the possibility we can get a string of weak ligament -- the labor market data that would allow the fed to start using process, which would painlessly diss advert the curve, bring the banking system back into all of that issuance, in terms of them participating. and the lease probable scenario for me is we just muddle through and the fed does not cut but

rates don't move. i think the most probable is the backend is still going to retest the 5% level. >> i want to bring headlines crossing the terminal. bloomberg had a conversation with fed governor michelle bowman who said she does not think it is appropriate for the fed to cut interest rates in 2024. she points to persistent inflation. when you look at that prospect, the idea we may not get a rate cut, what are the concerns? >> i think for the fed, they very watch -- they very much want to cut what they could do policy wise and say they will definitely not hike. i think the problem is the economic data. the economy is strong, the labor market is tight. there are greater worries of sticky inflation after three months of upside surprises. i don't think we have to get back to 2% inflation for the budget cut. it is why we accepted we get the

preference for higher inflation. we definitely need downsize surprises and inflation. a clear disinflation trend. not just one month. there are plenty of months in 2024. so we can get 2024 cuts read but it makes sense the cuts and that the people are thinking about not cutting this year. we have to see how the data comes in in the next few months. >> we have been talking about how rent is the last domino to fall. shelter costs. taking about the inflation story. how sticky is higher shelter costs? >> extremely. think about the various measures of rent, the apartment list, which is new rent, or the zillow observed, more of a blended of existing and new rents, they peaked in mid 2022. most academic research say it should be about a year lag before it filters into the cpi

or pcd measures. here we are nearly two years pass, and sure it has come off. we have left the seven months down averaging close to .75 per month. and it still has not moved down all that much. if you look at the measures on a quarterly basis, they have turned back up along with house prices. it is very unclear to me that we are going to get anywhere near the .2 five monthly increases or 3% annualized increase that persisted through the 2010s. i think the fed did serious damage to the housing market. they exasperated the imbalance by the way that they tightened. passive qt and aggressive rate hikes caused the deepest inversions since the volcker rate.

they damaged the supply side as much as the demand side. they just made things worse. i don't think it is possible to get to 2.5%. i would say that the expectation that the fed alone can bring inflation to 2% is not consistent with history, not consistent with the 1960's or 1970's. we need a tighter fiscal policy to bring that not housing services component down, which is reexam rated in the second half of last year. i'm not releasing what about the inflation outlook. sonali: skyler, what is your expectation? we are days away from another critical inflation print. where you most concerned we can see things too high? >> i completely understand the worries over sticky inflation. on the good side, it has been evident we keep getting these rises in commodity prices, even if they have moderated in more recent trading. we have continued global

political tensions. a have been in the background. that has meant continued shipping disruptions. both of those things feed into headline inflation. the bigger worry, because of potential for the second round of facts is on the services side. wages are fairly sticky in the 4% to 5% range, depending on what measures you are looking at. because we've had three months and upsides priced inflation surprises, it is harder to get the downside surprise. i will say in the u.s., there has been a supply-side rebuild. the labor market has rebounds with declines in the industries with the highest vacancies. i don't think higher wage growth has to be inconsistent with inflation if activity is rising. for us, one q was a bump on the road of disinflation. we don't go back to 2%. but certainly, we could get some downside surprise and inflation. >> i think what carlisle's

economists said, it seems to drive with what you are starting to say earlier about long-term yields come rising long-term yields. potentially higher than what we see today. you see these investors slamming the duration story. they are piling into the duration story. what is the risk they are wrong? what is the risk yields on the longer end of the curve are much higher? >> the brand name for our on-site's macro is it is never different. a tremendous amount of work on past periods. i think the applicable period to just get a long-term potential scenario or outlook for the treasury market is to think about the 1960's. we were unwinding the rate caps existed through world war ii. banks had piled into treasuries, it took 30 years to wind those positions down. we had a series of higher highs and higher lows as inflation rose along with more expansive

fiscal policy through the 60. i think that is very much where we are. having negative term premium on 10 year treasuries is really abnormal. when you look at that and lined it up with the whole qe era, it is clear that unless somehow we are going back to the zero lower bound because the economy becomes unglued, which seems highly unlikely with such expansive of fiscal policy, i think we are headed for higher rates and higher term premiums over time. sure we could have a hiccup in the economy and have a move lower in rates, but i don't see the policy rate settling in where the fed thinks it is going. 2.6%. i think 4% is more likely as a neutral policy rate. i think rates, the longer end, needs to have a term premium. that is where we are headed.

sonali: we have to leave it there. barry knapp and skyler montgomery koning, think you for your time. critical economic data ahead. i also want to bring you some news. a chinese ev maker began trading moments ago. zeekr opening at $26. that would be almost 20% above its ipo price of $21. zeekr sold 21 adrs. more than planned last night at the top of its marketed range. plenty of demand for this company. this is a high end electric car brand under the geely group. it is the largest listing by a chinese base company in the united states since 2021. you can see it with a market cap of almost $7 billion. stick with us. more "bloomberg real yield" ahead. this is bloomberg. ♪ even social posts... in minutes!

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>> i'm sonali basak. this is "bloomberg real yield." it is time for the auction block. global companies are seizing on strong demand and lack of clarity around funding costs to issue the most debt in years. looking at u.s. high-grade, nearly $56 billion of sales, way above estimates. cbs, charter, and hbc driving issuance to the third busiest week of the year. the list of sales was robust. you can see names like coca-cola, ubs, and hasbro. monday through wednesday, each saw 14 issuers for the busiest three sessions since 2021. it wasn't just investment grade, the credit party was also seen in high yields with almost $13 billion.

lifepoint helping push the pace to the best since 2021. guggenheim partners cio and walsh saying it is a good time indeed to buy. >> investment-grade credit, also, the high-yield market, particularly the higher credit quality part. avoid the lesser credits. we have some risk being rationed at triple c rated credit to be thoughtful about. you can see some spread widening. but historically, when the fed is on pause, it is a good time for credit. sonali: joining us is will smith, director of u.s. high-yield credit at alliancebernstein and dan's were in, ceo of arena investors. let's start about how you have perceived the last week. it has been a day louche of sales. have you been a buyer? >> we have participated in several transactions where we thought there was good value. overall being really selective. for those of you who are fans of

the nhl, we are in the playoff season now. toward the end of a game, the losing team will attempt to pull their goalie and a chance to score the goal that puts them to tie up the game. it leaves them exposed. it feels like there is a rush for investors to buy as they can. but the risk is great. you need to do credit homework. >> i'm glad you brought that up. you were quoted recently in a bloomberg story and you said there is this notion that because default rates are low, everything is fine. but it is not about default, it is about recoveries and actual losses. what are people missing? >> as a general matter, banks, insurance companies, and regulators tend to focus on defaults and interest rate coverage versus actual severity in these situations and the leverage you are taking on when you expose yourself to a capital structure. ultimately, you can manage and

create low default data by having week covenants. you can create high coverage data by charging little. you cannot fake it on leverage in severity. sonali: double down on that. there is an idea that data does not lie. sometimes it does. >> the choice of data may die -- may lie. if you are choosing the wrong data to express a certain thing it does not support, you can get fooled. historically, people have relied on a more homogeneous way of looking at credit in a way that doesn't necessarily anticipate changes we have seen in the way people structure and think about credit. sonali: we were talking about the idea spreads have remained incredibly tight despite expectations changing around fed rate cuts this year. do you think that is warranted? how can they blowout? >> it is always a difficult question to answer. when spreads are wide, it tends

to be when the economy is weakening. most of the time weakening more than folks anticipate. that is a difficult thing to time well. if you look at high yields in particular, there is really the story of the have and the have-nots. there's about 4% of our market pricing in a very high chance of default or restructuring of some sort. the other 96% of our market trades at the all-time tights. that is concerning to us. as we talked to investors, most folks are looking at markets and saying i want to buy credit because yields look good. but i don't want to take any real downside risk and crowded to high quality. with that has done is basically make high-quality bonds extremely expensive. it is not to say spreads are suddenly going to widen, but forward returns are going to be challenged.

you are not going to earn much more than treasuries if you are buying a bbb rated credit. at 120 basis points a spread. that really opens you up to an environment that may look different than the one we have today. growth slows or pick your poison in terms of a macro event. we always like to think about markets and how we can -- how much money we can lose if we are wrong. most parts of credit, you cannot make much of your right, but you can lose if you're wrong. sonali: how do you feel about the risk-reward? >> i would agree. you have to define what you're looking at in credit. in the tradable markets, corporate and abs, it is tight. the compression we have seen with higher quality and lower quality is low. there is more than that kind of credit. when we look at things like credit within growth enterprises, the embedded kind of credit opportunities available in the secondary market for lp interests.

when we look at the market for commercial real estate, there's other types of credit where there is very large value destruction that is happening. and the ability to be the beneficiary of that has begun. sonali: correct me if i'm wrong, but the last time we spoke you were a lot more sanguine about the state of credit. it feels like something has changed. what has changed for you? >> it is two factors. one is valuations. spreads have continued to grind a lot tighter. the second is investor behavior and things that start to look and feel more like animal spirits out there. folks kind of searching for the last risk premium. and that starts to be quite concerning. that means credit is being extended to areas it probably should not. the likelihood bonds -- bonds are getting mispriced, which we think is higher. and we start to get concerned

you are late in that credit environment where the chances you get burned are significantly higher. i would highlight those are the major areas that have changed. sonali: thank you both for joining us on these credit markets. certainly a hot topic. i want to bring you some breaking news. jim simons, the founder of renaissance technologies, has died at the age of 86. according to a statement by the simons foundation. he was the founder of renaissance technologies, a hedge fund continued debt considered a pioneer of quantitative investing. he hired mathematicians, astrophysicists, not your typical wall street type. he was one of the richest people in the world. he passed away in new york city. the foundation did not cite a cause. he was 86.

>> i'm sonali basak. chinese ev maker zeekr began trading moments ago. it opened at $26 a share. the ipo at $21 a share. we are joined by abigail doolittle. >> this is a positive, the fact we have two ipos in a week with strong demand. the stock price at 21, it opened at 26. right now closer to 27. up 27% on its first day. market cap of $6.5 billion. at the highs, it had been closer to $7 billion as a way of comparison, viking which went public, has a market cap of closer to 212 believe dollars. this is the largest ipo from a chinese based company. the high-end ev brand that since 2021, they raised $441 million.

up from what they were initially trying close to $370 million. the books closed on wednesday, but they reopened apparently, sold another -- 21 million shares total. in the second round it was 21. this is positive, it was oversubscribed. reopened the books, additional shares. the stock up 30%. >> this comes against an interesting backdrop. the biden administration is set to take a look at chinese electric vehicles and announce more about it early next week. >> the optics certainly are not very good. if you go into the financials, zeekr barely gets any revenue from the u.s.. it is china and europe. the optics are good. the choice by the biden administration, you have to think it is not a mistake. the first big ipo from a chinese based company on a day they choose to let the headline float. sonali: the ipo market staying hot. the rest of the volatility is still for next week with the cpi

data ahead. more on the trading of zeekr. more on markets next. this is bloomberg. her uncle's unhappy.

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sonali: welcome to "bloomberg markets." i'm sonali basak. a drop in consumer sentiments and hawkish comments from fed officials keeping them in check. we have an s&p 500 still in the green. a green week for the s&p 500. pretty much flat on the day. nasdaq 100 also seeing a little bit more love read about .10%. two-year yields, a little bit of a sell